Analyzing the Risks Embedded in Option Prices with rndfittool

Andrea Barletta and Paolo Santucci de Magistris
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Andrea Barletta: Department of Economics and Business Economics, Aarhus University, 8210 Aarhus V, Denmark
Paolo Santucci de Magistris: Department of Economics and Finance, LUISS University, 00197 Rome, Italy

Risks, 2018, vol. 6, issue 2, 1-15

Abstract: This paper introduces a new computational tool for the analysis of the risks embedded in a set of prices of European-style options. The software enables the estimation of the risk-neutral density (RND) from the observed option prices by means of orthogonal polynomial expansions. Orthogonal polynomials offer a viable alternative to more standard techniques based on interpolation and estimation of the second-order derivatives of option prices. The app rndfittool is available on GitHub and its usage is illustrated with examples based on real data.

Keywords: European options; risk-neutral density; MATLAB app (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:6:y:2018:i:2:p:28-:d:138299

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